Pressure on Chinese banks’ margins will ease as credit demand picks up

By Ziyi Tang and Ryan Woo

BEIJING, Feb 13 (Reuters) – An expected rebound in loan demand in China this year, from both businesses and households, will ease pressure on banks’ interest margins as they come out of a pandemic-induced economic downturn.

Chinese banks’ net interest margins, a key measure of profitability, have come under pressure over the past two years as widespread COVID-19 lockdowns and a slump in the real estate sector have severely damaged confidence. consumers and businesses.

With the lifting of COVID restrictions in the world’s second-largest economy in December, bankers say they expect household demand for credit to pick up again in the coming months, driven by a rebound in consumption, as well as a strong resumption of business loans.

This should improve Chinese banks’ net interest margins (interest earned on loans less interest paid on deposits) and therefore their profitability at a time when Western banks are expected to be affected by weak economies.

According to data from Refinitiv, net interest income for five of China’s largest banks is expected to fall between 1 and 5 basis points this year in 2023, compared with a decline of 29 basis points last year.

Financials are also expected to post faster or more stable net profit growth this year. Net profit growth at Bank of Communications, for example, is expected to accelerate to 7.21% in 2023 from 4.75% in 2022, the data shows.

According to Wang Yifeng, banking analyst at Everbright Securities Co., the banking sector’s net interest margin is expected to rebound in the second half of the year as Beijing’s fiscal policy support takes effect and business gradually picks up.

The margin will also be strengthened by the recovery of the economy, which will allow local banks to charge higher long-term interest rates on loans.

Banks cut deposit rates, a key source of funding, to ease pressure on margins last year, following successive cuts in lending rates to protect the economy from the housing debt crisis and of China’s strict zero COVID policy.

“Credit expansion will continue as the economy gradually recovers,” Wang said. “With the government’s economic stabilization monetary policies taking effect, it is expected that the banking sector will be able to make further gains.”

New bank lending in January more than tripled December’s figure and beat expectations, data showed Friday, as the central bank tries to revive the economy.

Data from January shows bank lending was the “main channel” and possibly a cheaper way to raise funds than the credit market compared to a year ago, economist Iris Pang wrote in an article. research note, head of China at ING.

(Reporting by Ziyi Tang and Ryan Woo; Editing by Sumeet Chatterjee and Jacqueline Wong, Spanish editing by José Muñoz in the Gdansk newsroom)